Mon, Nov 29, 2021|Whitney Tilson

Thoughts on the omicron variant; The 'Tesla-financial complex'; Get winter tires if you drive in the snow

If you were to tell me that the stock market will crash by 25% or more over the next year and asked me to identify the possible reasons for it, here are my top three:

a) Rising inflation and/or debt levels worldwide will roil debt markets and spook equity investors.

b) A new COVID-19 variant will emerge that is resistant to the current vaccines, leading to a surge in deaths and a return to lockdowns.

c) We will get into a shooting war with China – likely over Taiwan.

Sure enough, the second one - the rise of the omicron variant of the coronavirus - is spooking investors, leading to the worst Black Friday for the markets in 90 years.

It certainly has me reevaluating what I wrote in Wednesday's e-mail, where I laid out the case for why I "highly doubt" that "a resurgence of the pandemic lead to a reimposition of lockdowns."

I've been doing a lot of reading about the new variant over the weekend and shared what I found with my coronavirus e-mail list on Saturday (to join it, simply send a blank e-mail to: cv-subscribe@mailer.kasecapital.com). You can read my full e-mail here. Here's a summary:

The world is freaking out about the new omicron variant. Is this warranted? It's hard to say because we don't know anything for sure right now, so I suppose it's better to be safe than sorry until we know more.

Before I dive into a discussion of the new variant, I want to underscore that it's now even more of a slam dunk case to get the booster as soon as you can...

In summary, I think this article is exactly right: don't think of this as getting a two-shot vaccination and then an optional booster: We Screwed Up, This Is Really a Three-Dose Vaccine.

Here's an op-ed in the Washington Post making the same point: What the CDC got wrong with COVID-19 booster shots...

Here's Dr. Kevin Maki's summary of the situation today:

Regarding the new omicron variant, I think it is too early to draw any firm conclusions. The types and locations of the mutations raise concerns about transmissibility and ability to evade vaccine-induced immunity. We have very little epidemiology to suggest that this variant is truly more transmissible than the delta variant. If it is, that would be of concern because a more transmissible variant would likely become dominant, as happened with the U.K. variant then the delta variant.

Even if omicron has some ability to evade vaccine-induced immunity (B cell and T cell), that does not mean that the vaccines will be impotent against this variant, only that there may be less protection. Even if protection with the new variant starts out lower (maybe 50%-60%), it may still do a decent job of protecting against severe outcomes.

We should know in a couple of weeks how well serum from vaccinated individuals neutralizes this variant. Also, epidemiologic data will help to establish the severity of illness for omicron breakthrough infections now that we will have variant-specific surveillance. It would take at least four months to produce a booster specific for this variant.

Finally, in a few weeks, the FDA (Food and Drug Administration) should grant emergency use authorization for oral antivirals. The Pfizer (PFE) cocktail appears to be particularly good.

The combination of readily available testing, vaccines, and therapeutics (oral antivirals and monoclonal antibodies) mean that we are in a much better situation than we were at the start of the pandemic. As a result, I am not overly concerned right now, although that could change if new data emerges showing that the omicron variant has a higher ability to evade vaccine-induced immunity.

Lastly, here's the latest from front-page stories in today's New York Times and Wall Street Journal:

2) I also closely follow Tesla (TSLA), though I continue not to have an opinion on the stock as either a long or a short. It's just a fascinating industry and company with a fascinating CEO. (If you'd like to join my Tesla e-mail list, simply send a blank e-mail to: tsla-subscribe@mailer.kasecapital.com.)

Here's the e-mail I sent last week:

Here's an interesting article in the Financial Times about how Tesla's stock – and especially the options trading around it – are so enormous that it's disrupting markets: The 'Tesla-financial complex': how carmaker gained influence over the markets. Excerpt:

The rally in Tesla's shares has lifted the overall stock market value of Elon Musk's electric carmaker to over $1.1 trillion, making it one of the most valuable companies in the world. This year alone, it has added almost $475 billion in market capitalization, equal to a Procter & Gamble (PG), a JPMorgan Chase (JPM) — or two McDonald's (MCD).

However, the real importance and wider footprint of what might be called the "Tesla-financial complex" far outstrips the company's market capitalization. This is thanks to a vast, tangled web of dependent investment vehicles, corporate emulators, and an enormous associated derivatives market of unparalleled breadth, depth, and hyperactivity.

Combined, these factors mean Tesla's influence over the ebb and flow of the stock market is far greater than even its size would imply. It may even be historically unrivaled in its wider impact, some analysts say.

"We don't really have the language to describe Tesla anymore," says Michael Green, chief strategist at Simplify Asset Management. "It's like explaining to a person in a two-dimensional world the concept of 'up.'"

I would have guessed that Tesla options were heavily traded, but not to this extreme!

3) We spent Thanksgiving with Susan's family in the Berkshires in western Massachusetts, where we got five inches of snow on Friday.

The roads were treacherous, which made me extra glad that I had our winter tires put on our car a week ago!

Here's what I wrote about this a year ago:

Susan recently took our car (a 2018 Volvo XC60) to the Volvo dealership for its regular servicing, and they told her it needed new tires, which would cost more than $2,000.

Fortunately, she said no for three reasons: 1) Costco Wholesale's (COST) tire center charges less than $1,300... 2) they measured the tread and said our tires don't need replacing – we can get another season out of them... and 3) it prompted me to do some research about whether we should get a second set of winter tires for the upcoming season.

Having a second set of tires is expensive (especially if you buy wheels/rims, as I did), it's going to be a hassle to change the tires twice a year, and an extra set of tires takes up a lot of room in our storage bin in the basement of our apartment building.

So why do it?

One word: SAFETY!

I've become a total car safety zealot ever since Susan fell asleep at the wheel three years ago this weekend and got in a frightening accident – one of a half-dozen serious accidents that various friends and family of ours have been in, resulting in numerous terrible concussions and, tragically, two deaths. I wrote about it in this article: Why you should get a new car.

The evidence is clear: Winter tires aren't a little safer – they're a lot safer if you do any amount of driving on snow and ice. This New York Times article, What's on Your Car? Winter Tires, We Hope, explains three reasons why:

Unlike all-seasons, winter tires have an increased tread depth that helps channel away snow and slush and improves traction by packing snow in the tread grooves for what Bridgestone, the tire company, calls "snow-on-snow" traction. The idea is to take advantage of the stickiness that makes snowballs hang together.

More noticeable are the many added small slits, called sipes, in the tread surface. The sipes help the tire by presenting more edges that can dig into the snow for grip. Smaller voids in the rubber surface help to disperse the layer of water that often lies over snow. That's also a significant benefit when the surface has turned to ice like it's done this winter.

What you won't see, though, is the rubber chemistry tailored to cold-weather duties. Winter tires are engineered with softer compounds to remain flexible at far lower temperatures. While a summer performance tire becomes stiffer and loses grip as temperatures dip toward freezing, a winter tire stays pliable, making it superior even when the roads are dry.

Winter tires' superiority is obvious if you simply look at the tires. Here's a picture I took of our original all-season tire that came with the car (on the left, wrapped in plastic, ready to go into storage) and the new winter tire just installed on our car on the right:

Now watch this 3:20 video and read this related article: Are Snow and Winter Tires Worth It? It tests a new car with all the latest safety features like anti-lock braking and all-wheel drive accelerating, turning, and braking on a skating rink – the only difference is the tires. Going a mere 12 mph, it took 57 feet for the car to come to a stop with all-season tires versus only 34 feet – 40% less! – with winter tires. And going around a corner at an even slower 11 mph, the car without winter tires skidded out of control.

One of my friends later sent me this e-mail:

I just wanted to send a quick thank you for your e-mail on winter tires. My wife and I recently bought a weekend home outside NYC, which has a driveway that goes up a steep winding hill. Between your advice about the safety benefits and my worries about trying to drive up that hill covered in snow, we took the plunge and purchased winter tires.

I found an awesome service, RoadRunner, that comes to your home and changes the tires for you. It was super easy. We got the Bridgestone Blizzak tires, which were highly rated in Consumer Reports, and had them installed before the first big snowstorm of the year.

I've driven the car during the recent storms and even tested the tires by braking hard on side roads that were still snow-covered, and the tires perform amazingly well.

My wife has driven the car several times during and after the big snowstorms we've had, and I've been greatly comforted by having winter tires to help keep her safe.

Thanks again for your super helpful e-mail!

Best regards,

Whitney

P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.